morongobill's  Instablog

Rumors abound on the net and on Wall Street about this former investor darling. But recent events such as the puncturing of the speculative rare earth elements price bubble and management missteps, just to name two of the most glaring events, have led inexorably to a fall back to earth for this once high flyer.

The stock is currently trading in the low 7$ range, down from a high of near $80 at the height of the commodities bubble. With the recent announcement by the Molycorp management team that phase 2 of the Phoenix Project has been postponed due to market conditions, plus the admissions by management in the recent SEC filing that announced a $300,000,000 secondary stock offering priced @ $6 per share in which it was admitted that the energy and water issues had not been resolved yet; as well as the chlor/alkali processing plant not being finished yet- 3 items absolutely crucial to the success of Project Phoenix and Molycorp's new "mines to magnets" strategy and to becoming the lowest priced producer in the world of rare earth products- many unbiased observers are likely to see the future of MCP share prices as heading downward, perhaps as deep as the pit at Mountain Pass.

As I have said many times here, I believe in Molycorp and its' continued viability as the western hemisphere's premier supplier of rare earth materials. Despite all the management missteps, those above and others too numerous to document, I still am bullish on the future of this company. Now there are analysts who are pounding the drum, talking up the intangibles factor, primarily from the now Molycorp Canada acquisition. In other words, Mr. Con K while heading up the then Neo Materials got the better of Molycorp's negotiators with the fantastic deal for his shareholders. I have no problem with that historical fact. Moly bought at the peak and now has to deal with the valley, and the subsequent cratering of its' common stock price.

There has been a lot of buzz on the web about potential suitors for Molycorp in a friendly or not so friendly takeover. Everyone from the Chinese to Nissan Motors or Siemens, have had their names bandied about- this has also had the effect of further depressing the MCP share price I believe, and thus further turning off potential investors in the company.

Current trends continuing, I don't see any reason for this year, 2013, to show a big pop up in this stock. Considering recent company advice that the production levels will not be reached with the indefinite postponement of completion of the Phoenix Project, there is no reason to look at this stock as anything other than a problem company trying to stop the flood of red ink with just a little pail- this stock may very well reach the depths of the recent J.P. Morgan downward target of $5 per share. Look out below.

Now that I have given so much negativity, let me toss in a positive which I am relaying not in dry financial terms but in real world mining terms. The Mountain Pass mine is a "gold mine," or the "goose that lays the golden eggs." This factoid is lost in all the smoke rising up from what some investors believe is the still hot crater that once was the mighty Molycorp. We all need to dunk our heads in a bucket of ice water and then stop and breathe in deeply the wonderful scent of all those lanthanides just waiting to be dug up- by the way, those reserves have now been reliably verified as being around 36% larger than previously thought.
(click to enlarge)

Now we may very well write off Molycorp's board and previous management for their errors in trying to implement their new company vision. But we should not dare to attempt to write off as inconsequential, all those proven mineral reserves, that are worth countless billions of dollars even at these current market conditions. It is my belief that we need to think outside the spreadsheets when we try to assess these "money in the bank assets" against the accounting sheet intangibles.

This writer believes that the intoxicating scent of all those lanthanides wafting up out of that pit at Mountain Pass, is proving to be almost too much to resist for Moly Met, one of, if not the largest investors, in Molycorp to resist. This Chilean mining firm, one of the best run in the whole world, now has added another 15 million shares priced @$6, or $90 million to its' already large holding in Molycorp. This does not sound like they are taking a flyer in this stock. To me, it sounds like the first move in a takeover gambit, starting out friendly but only time's passing will predict emotions at the end.

It was announced yesterday that SEC filings showed that Molibdenos Y Metales, the giant Chilean mining concern, is by far, the largest shareholder in the company. Molymet, as the company is otherwise known, now holds a total of 32,050,700 shares that cost from $10 down to now $6 per share. This buying in as the market drops is akin to what brokers advise their clients to do after they pitch them on the latest stock of the day from their bosses, advising them to "dollar cost average" or buy at the dips.

Somehow, I have the feeling that is not the strategy in play this time. Considering that the former CEO of Molymet, John Graell Moore, is on the Molycorp Board of Directors, wielding considerable influence on future and current strategies for the company, I believe that now is the time for an opening move to be made for the acquisition of Molycorp by Molymet. As the single largest shareholder and known worldwide for their prowess in the global mining business, it makes sense for a marriage to occur, willing or otherwise.

My belief is that Mr. Moore and the Molymet board know the intrinsic value in Molycorp lies in the ground at Mountain Pass. They know mining, and they know how to do it globally. They also know marketing. But the real big deal with Molymet is that they know how to make and keep their hands on money. See the balance sheet below for details:
molymetcorp.com/en/our-company/9-financi....html

As you can see, there is plenty of cash on hand to fund more stock purchases or to entice an investment bank to come around to the view that these companies need to be married. I am not so naive as to believe that a merger would sail through without a peep from Congress either, not when so many believe that the pit at Mountain Pass is a national strategic treasure worth defending. My concern would be that their need for campaign contributions might cloud their judgment, one I feel many of my fellow citizens might subscribe to as well. But since, Chile is an ally of ours, surely a merger would go through in the end.

It does no one any good except shorts covering their positions to see Molycorp stock twisting in the downdraft day after day. It seems obvious for this outsider to see that no way is the market going to give Molycorp the time to work out its' financial and logistic difficulties, and nor will China. It would do the Chinese a world of good for this company to fail, buying them time as they restructure their rare earth industry and begin the environmental cleanup, and keeping their customers on the string. Molycorp surely will be a formidable foe once the Phoenix Project is done and the promised cost savings kick in. It is in the Chinese interests that it not occur.

It is in the United States strategic interests that Molycorp not fail either. However, with the divisions in the Congress, I don't see anyway that an aid package could go through, nor do I see the will being there to interfere with the free market. Translation- there is no will in Congress to stand up to Wall Street as it makes money hand over fist presiding over the Molycorp disembowelment, which surely is at hand, if a suitor doesn't step forward, quick!

Everything said, in this blogger's opinion, Molymet should begin the process of buying Molycorp and integrating it into Molymet with the continued presence at the helm of Mr. Con K to run the show and finish the necessary steps to bring Molycorp back from the pit and into the top ranks of rare earth producers where it rightfully belongs.

Please note that this blogger may or may not acquire a stock position in MCP, Molymet or any other stock, and all opinions expressed are just that, his opinions, worth as much or as less as any other talking head's. This blogger is not a registered financial analyst or broker, nor a merger and acquisition specialist, and has no intention of becoming one in the future, nor is he a mining expert or claim to have any expertise in any area.

Morongobill

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.